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Dover Corporation (DOV)
Annual Investor Day & Initiates 2013 Guidance Conference Call
December 10, 2012, 01:00 pm ET
Paul Goldberg - VP, Investor Relations
Bob Livingston - President & CEO
John Hartner - President & CEO, Dover Printing & Identification
Tom Giacomini - President & CEO, Dover Engineered Systems
Bill Spurgeon - President & CEO, Dover Energy
Jeff Niew - President & CEO, Dover Communication Technologies
Brad Cerepak - SVP & CFO
Shannon O'Callaghan - Nomura Securities
Nathan Jones - Stifel Nicolaus Weisel
Previous Statements by DOV
» Dover Corporation's CEO Discusses Q3 2012 Results- Earnings Call Transcript
» Dover CEO Discusses Q2 Results - Earnings Call Transcript
» Dover's CEO Discusses Q1 2012 Results - Earnings Call Transcript
Very quickly I would like to go through the agenda. We are going to start with some opening remarks from Bob and he will talk about the strategy and some other interesting things and then we are going to jump into to John Hartner, he will let you know what's going on in Printing & Identification. After that, we are going to have Tom Giacomini who will talk about Engineered Systems particularly the Anthony acquisition. He will give you a lot of information on that.
We are going to have a short break after that. We will have some coffee and refreshment outside, so you can mingle with the management team. And then we will come back and Bill will tell you what's going on in Energy and talk about production in downstream which we are pretty excited about. And lastly, well not lastly, but the last segment presentation is from Jeff Niew and Jeff will talk about particularly the handset market and tell you some of the nice progress we've been making at Sound Solutions and why we are excited about the market in 2013. And then Brad will tie it all together with our outlook for 2013 and for the first time I think since I have been at Dover we actually provided guidance at Dover Day, so hopefully you find that helpful. And then Bob will have some closing comments and we hope to have maybe about half hour of Q&A. So that's the agenda. Its’ going to go fast.
And before we get started, we have the obligatory forward-looking statements. We want to remind everyone that our comments may contain and will contain certain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover Corporation by referring to our Form 10K, for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements and of course you can always look at our website, www.dovercorporation for a whole lot more information.
And with that, without any further ado I would like to invite Bob Livingston up here and I hope you enjoy the day. Thanks.
Thanks Paul. It does seem like it’s been a year Paul, in fact it’s been a year and a week since our last gathering here. Good afternoon everyone and thanks for taking time to joining us for Dover Day 2012. We are delighted to have this time with you today.
For over 50 years Dover’s success has been linked to our unique entrepreneurial business model that focuses on product innovation and our customers. We have in the past few years expanded upon this model and are also heavily concentrating on developing our talent and leveraging our scale. As you entered the room today, you may have noticed on the screen a slide that we believe clearly captures the essence of Dover and if you are looking at your handout book, its reprinted on the inside front cover of today's book. I'll be talking more about that in just a moment.
So let's begin. During my opening remarks today, we will start by reviewing Dover strategy. We remain on-track and firmly committed to executing against this strategy that we outlined to you about four years ago. Next, we will take a closer look at what we've accomplished in 2012 and a few comments on the fourth quarter.
We've made a few announcements, a couple of announcements in the past few weeks. These announcements can be characterized into two distinct areas. One area deals with capital allocation, while the other focuses on the ongoing strengthening of our portfolio towards higher growth markets and more consistent earnings streams.
Finally, we will initiate guidance for 2013 today. While I’ll touch on some of the highlights across Dover, our segment leaders will take a more in-depth look at many of the exciting initiatives that are driving their businesses. You will hear that we had many positive activities going on around Dover, which provide us with solid momentum as we enter 2013. Last year, the theme of our meeting was positioning for growth. This year, we want to talk about our strengthened company.
First, let me share what I believe have been the attributes and characteristics behind the success we've had for the last several years. We firmly believe that our track record of success is truly based upon several factors; our core technological advantage, both the technology that we’ve developed internally as well as the technology that we look for and acquire. Our leading brands in the industries we serve; our commitment to industry leadership through innovation and building scale and our dedicated and strong focus on the customer.
To give you some data points on our track record of success, our 10-year revenue CAGR is 11%. We have improved segment operating margins. Our 10-year earnings CAGR is in excess of 15%. Our free cash flow remains very solid and consistently at 10% of revenue or better and I am pleased that 2012 marks our 57th consecutive year of dividend increases.
We changed our segment structure last year, as reflected on this slide. The change of allows us to better focus with a more balanced management approach on our five key growth spaces. These five spaces are highlighted in yellow. The change also increases opportunities for leveraging resources within the segments. You will note the change to the structure of the Dover Printing & Identification segment which has been streamlined to reflect our recent divestiture announcement.
I do want to point out that our growth space now represents 77% of our sales and 79% of our operating earnings. The five growth spaces are all areas of higher growth and we will continue to add capital to expand and grow the spaces even further. We believe we have been taking the right actions over the past few years and have significantly strengthened our company. We believe we are well positioned for further growth.
We have been sharing this chart with you for four years. We believe that these five macro trends provide tailwinds for Dover; especially for our five key growth spaces. You will find clear evidence of the importance of these tailwinds in our upcoming segment discussions.
A key part of our strategy for the last four years has been to expand our presence outside of our core markets in North America and Europe. A key focus for us has been Asia, specifically China. The chart on the right illustrates the success we’ve had in growing our business activity in Asia since 2008. About 16% of our revenue came from Asia last year and year-to-date in 2012 its 18%. We expect that growth to continue.
As a point of reference, our sales in North America were in the low 60s range just a few years ago and even though we are still growing nicely in North America, the growth in Asia has occurred at a faster pace.
We continue to leverage the strength of Dover in our activity encompasses a wide menu of initiatives such as productivity, supply chain, shared facilities and services and a growing focus on talent development. As we look ahead, part of our global growth will come from businesses that traditionally have not been as international as others. For example, our Energy segment has an excellent opportunity for international growth by leveraging the strength of their expanded product, technology and service offerings to new customers in the Middle East, Asia Pacific and South America. You will hear more from Bill on this later.
Even with the market challenges of a weak Europe, a slowing China and our disappointments with the early results at Sound Solutions; I’m very pleased with the performance we’ve delivered in 2012. Revenue will be up about 10% and this year we’ll mark another year of record earnings and expanding segment margins. We continue to execute on productivity initiatives and generating strong cash flow. We’ll talk a little later about this year’s highlights.
So let me give you a brief update on the fourth quarter. Our broad portfolio of industrial businesses in engineered systems continues to perform quite well and as expected. In Energy, the production and downstream businesses remain solid.
We continue to be quite active with the completion of oil wells specifically around our artificial lift products and tools. We’ve talked before about the problems and challenges at Sound Solutions.
We’ve been making progress and expect the fourth quarter to show sequential improvement in both earnings and revenue. Sound Solutions has also been quite active on many new designs and product development activities for 2013.
We’ve made some announcements in recent weeks. We are divesting the businesses in our electronics assembling and test phase. This market continues to be very inconsistent and though these businesses are very well managed and leaders and their respective market niches, the volatility of the market makes it quite difficult to generate consistent and predictable results.
We announced a $1 billion share repurchase program to be executed over the next 12 months to 18 months. Brad will give you an update on this activity later this afternoon. And we continue with our activity to build out our five key growth spaces.
We recently announced the acquisition of Anthony, so a quick summary of Anthony. First, it’s a business with whom we’ve had a long relationship. They have been a key supply partner to Hill Phoenix for several years. The purchase price was approximately $600 million and their 2012 revenue is slightly above $300 million.
In addition to significant cost synergies, we are very enthused about the market and expansion opportunities that are available. First, Anthony provides significant opportunities for cross selling of Hill Phoenix products in the same store channel, an area which we currently don’t participate.
Second, as you know Hill Phoenix has been growing north and south into Canada and Latin America and this business opens up a broader footprint for us with their operations in China and in Europe.
And lastly, we feel that this business on to itself will grow at a very substantial rate based upon the re-skinning and 'close-the-case' product offerings. Just to give you an idea of the opportunity, in 2012 'close-the-case' only represented about 10% of Anthony’s revenue. We think Anthony has a significant and very long tailwind behind it.
Let’s take a little different look at the significant changes we’ve made it at Dover over the last few years that we believe had greatly strengthened our company. We’ve talked about our strategy of building out five key growth phases and as you can see, this strategy is having an impact.
We're delivering more of our revenue and earnings from our growth spaces which have positive trends and stronger growth prospects due to favorable tailwinds around areas such as sustainability, energy demand and consumer safety to name a few, and four short years of revenue from our five key growth spaces has grown from 56% to 77%.
While we have been focused on deploying our M&A capital into these five key growth spaces, our businesses outside of these five growth spaces have also been performing quite well.
They had been growing at a rate above 3%, they’ve continue to improve margins and they’ve generated tremendous cash flow. The earnings and cash flow had been incremental to EPS and help provide the cash to invest in our growth spaces.
We have done 26 acquisitions over the last four years and we continue to see ample room to do more. Given the growth profile of our strengthened company, by 2015, our growth spaces will account for more than 80% of our sales.
Lastly, just to remind you that in this chart, our divestitures include not only the electronic equipment companies that we recently announced but also the previous divestitures in the construction space.
Let me show you how this change in our portfolio has improved our consistency of earnings. We measured the variation in our earnings over the last six years. Our earnings over this period which includes the recession shows a 15% variation to our average.
It is interesting to note that the divestiture of our construction businesses along with the planned divestiture of our electronic, assembly and test businesses will reduce our earnings variability by over 50%.
As we continue to shape our portfolio and focus on our five key growth spaces, we will continue to reduce our earnings variability. We believe that this performance, our performance will put us in the top quartile of our peer set. I am very pleased with the overall portfolio.
Dover is comprised of larger and strengthened businesses and very sizeable markets. We have significantly enhanced our businesses in artificial lift. We are now a full line acoustic supplier. We have been making investments in our fluids space and we would like to do more. And we have made investments in refrigeration and we really like our position in that space.
I am very pleased with the progress we have made on strengthening our company. As we look forward to the next three years, given the markets in which we operate and the strength in the position of our businesses, we expect our growth to remain above market rates.